Inflation, Risk Shifts and Political Blather

The government measures price-changes that occur in the cost of goods and services in the economy. They represent that measurement in an index, and then use that index to inflate the cost of government programs. The most often quoted measurement is the consumer price index (CPI). This index measures items like, housing, apparel, transportation, medical care, recreation, education and communications.

The cost of food and energy are excluded.  Economists measure these items separately as something they call headline inflation because food and energy prices are so volatile. Headline inflation, as they are so fond of saying, tends to return to the core inflation level over time. Duh! This phenomenon may be of interest to economists preparing and studying reports but did they ever consider what they’re words mean to families and retirees who need food, light and heat every week? A family’s timeframe is not measured in rolling five-year periods wherein headline price-changes caused by excesses and shortages are “averaged out.” The increased cost is borne in the present. Their timeframe is the moment they pump gas, burn heating oil, or buy baby food or corn flakes.

We planners have to step up and represent the interests of families and retirees whenever we hear thoughtless economists, politicians and commentators discount the effect of headline costs, and talk as if people didn’t have to pony up the extra dough spent in the present when they buy milk or eggs or porkchops. Lean Hogs, by the way, “is one of this year’s best-performing commodities”(1)

Although the volatile nature of headline cost does periodically produce some relief in the form of lower gas and food prices try telling the grocer not to expect full payment in the present when the prices rise. “Oh dear,” one might say to their grocer, “your prices are high. Thank goodness the government told me that these higher prices are transitory. I’ll just pay the old price. Then, when prices fall, I’ll do the same for you and pay the old price then as well, okay?” We can easily imagine the dumbfounded grocer’s response.” Sure it’s okay. Now you just sit here, next to the lettuce while I call your doctor.”


The CPI and sequence-of-return risk

            Market losses are the usual grist for the sequence of return discussions but inflation averages are also subject to this phenomenon. An unplanned for, high rate of inflation occurring early in retirement can disrupt a plan. Unlike the stock market where average returns are calculated from positive as well as negative returns. The CPI doesn’t often include negative inflation numbers. The rate of inflation is lowered by including lower but still positive inflation numbers. That means that a period of high inflation will reset your expenses higher with a low probability that they will fall. After prices reset, they are likely to rise from their new base.


Risk Shifts and Political Blather

Politicians like to brag that they decreased some program cost in real terms. Okay, great job; but why the modifier? Why can’t they just say that they reduced a program’s cost? Well, it’s a little verbal prevarication that means that the cost actually rose. It just rose less than the rate of inflation. That is not a decrease. It is, however, what they want you to hear in a ten second sound bite.  “During my tenure I was responsible for a decrease in real terms yada, yada and yada…” In other words, their programs are protected from inflation; but what about your clients. Are their CDs and bond coupons rising in “real terms” or are they shipping on more and more market, duration and credit risks in their quest for yield?

The shift of risk from insured FDIC paper to high Yield bonds feels oddly reminiscent of the risk-shift from Defined Benefit plan sponsors to 401(k) participants, doesn’t it?


Mike Helgesen
Director of Development
Real Intelligence LLC

Notes: Michael Hirtzer, Rising Pork Demand Drives U.S. Hog Prices to Highest Since 2014, Bloomberg, April 7,2021,



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